In 1998, amid a sovereign debt crisis, Ukraine imposed large
losses on depositors that were not fully compensated,
triggering public ire. Fast-forward to March 2013: Ukraine is
now exposed thanks to depositor haircuts in another country,
just as Kiev appears to be marching towards a
balance-of-payments crisis.

While most attention has focused on the Russian impact of
the Cyprus crisis, and the associated geo-political malaise,
Capital Economics sounded the alarm in a research note on
Thursday.

In the note, the research house argued that while Ukrainian
deposits in Cyprus were low, ranging between $1 billion to $3
billion, compared with $30 billion of Russian money,
disruptions to business transactions would exact a heavy, and
pro-cyclical, toll for the Ukrainian economy.

The fear is capital controls in Cyprus will imperil vital
transactional flows, disrupting business activity in
Ukraine. At the same time, Kiev is mired in a
balance-of-payments crisis and faced with a collapsing
currency. The current account deficit is at a record high of 8%
of GDP and the country faces a busy external debt-repayment
schedule this year, totalling $55 billion, representing some
40% of GDP over a 12-month period.

And yet the central bank has only three months' worth of
import cover in its FX war chest. It is little wonder that
policymakers are trying to talk up the currency, in an
anti-currency war.

Capital Economics concludes: "To make matters worse, the
economy slipped back into recession towards the end of last
year. And despite all this, there has been little progress in
negotiations with the IMF over a new financing package. The
Fund arrived in Kiev yesterday for a new round of talks, but
with the government still reluctant to hike household gas
prices [the IMFs key requirement], we think the
much-needed deal may still be some way off."

It adds: "The upshot of all this is that although the direct
impact from the levy on deposits in Cyprus on the Ukrainian
economy is likely to be limited, wider vulnerabilities mean
that the Cypriot crisis may still be enough to tip Ukraine into
a financial crisis of its own. Whats more, without an IMF
deal in place, Ukraine is extremely exposed if the Cypriot
bailout triggers a fresh spike in financial market
tensions."

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